Flagstar Selling Off Branches to Return to Profitability

After posting 13 consecutive quarters of net losses, Flagstar Bancorp (NYS: FBC) is chalking out ways to get itself out of the red ... and divestment seems to be the first step in its gameplan. It has agreed to sell off its Indiana branches to First Financial Bancorp (NAS: FFBC) at a 7% premium on deposits held at these branches. But will that be enough to put it back on track?

Flagstar's performance in the latest quarter has been pretty unimpressive, as the bank reported a decline in net interest margin due to a dip in average interest-earning assets. Provisions for loan losses and delinquencies further hurt results. To strengthen its operations, it is shuttering branches in a strategic way. It's selling 22 branches, 18 of which are in the Indianapolis market, to First Financial. Recently, it also agreed to sell 27 Atlanta branches to PNC Financial Services (NYS: PNC) .

Positive signsThese sales will allow Flagstar to focus on markets that it feels are more profitable, such as its Michigan retail and commercial banking divisions and New England commercial banking operations. CEO Joseph Campanelli calls these the markets with "the greatest returns and growth potential." Campanelli also said that the bank has seen some significant improvements during the first half of the third quarter. Due to the current favorable exchange rate environment, there has been a boost in Flagstar's mortgage business. In addition, gain on loan sale income for July was noticeably higher than in the recent past. The sale of the branches should complement these improvements and elevate margins.

What's in it for First Financial?As for First Financial, this deal will allow it to expand in the key market of Indiana, where it already has branches. The Cincinnati-based bank, which is aggressively buying assets, also plans to buy 16 Liberty Savings Bank branches in Ohio. This may hurt its earnings for the upcoming quarters, but will eventually add to earnings in the long run.

The Foolish bottom lineFlagstar's strategy to do away with some of its branches and focus more on key strategic markets might help strengthen its balance sheet and allow it to cope with weaker revenues. Moreover, the improvements discussed above could finally start to better its earnings.

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At the time this
article was published Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of PNC Financial Services Group. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.